The think-tank warns Scotland will need to change the way it develops workers skills in order to meet challenges in the longer term.

The key challenges identified include funding skills training, addressing current weaknesses in the economy, responding to the pace of change, the shift in demand in the labour market, globalisation, Brexit, migration, automation and longer working lives.

Other challenges for future skills development outlined in the research include promoting a high-skill business model among employers, transferring learning, and producing “technologically-savvy learners and employees”.

The report states the Scottish Government currently invests more than £2 billion a year in further education, comprising more than £1 billion for universities, £500 million to further and higher education colleges, more than £250 million for skills – including modern apprenticeships – and around £250 million to the Student Awards Agency for Scotland (SAAS) to pay tuition fees for EU and Scottish-domiciled higher education students.

The report found the pay rate in Scotland has again fallen behind the rest of the UK after gaining ground in the five years to 2010.

IPPR Scotland said fewer Scots in low-skilled jobs progress to higher skilled positions compared with the rest of the UK.

IPPR Scotland said since the 2008/09 banking crisis,college sector funding from the Scottish government has reduced by 18 per cent in real terms and the wider skills budget has dropped in cash and real terms from £204 million per year in 2009/10 to £176 million per year in 2016/17.

The report states: “Rates of productivity, career progression and levels of pay are clear weaknesses in Scotland.

“While productivity has improved in Scotland against the UK-wide rate, productivity across the UK has stalled in recent years.

“The proportion of working people progressing from low-skilled jobs to mid- or high-skill jobs is lower in Scotland than the UK as a whole (excluding Northern Ireland).

“Although pay rates in Scotland caught up with the UK rate between 2010 and 2015, pay in Scotland and the UK has fallen in real terms in recent years.”

The think-tanks discussion paper, which “aims to stimulate debate and generate ideas for the future of the skills system in Scotland”, outlines six “priorities for action”, namely:

* embedding an outcome approach and setting a clear national purpose of the skills system

* regional integration of the skills system

* clarifying roles of learning routes within the skills system

* learners and employers co-designing a responsive skills system

* improving flexibility of learning

* increasing transferability of learning

IPPR Scotland suggests action in these six areas will prepare Scotland for the long-term challenges ahead in meeting labour market needs.

Commenting on the report, Minister for Employability and Training, Jamie Hepburn, said: “We know it's important that we address skills gaps and have confirmed we will use the apprenticeship levy, which the UK government forced on Scotland without consultation, to give both employers and employees more options and flexibility.

“We will boost Modern Apprenticeships and address skills gaps and the training needs of existing employees where a full apprenticeship might not be appropriate.

“Our review of enterprise and skills agencies will look at building on existing strengths to ensure a system where all of our agencies work with each other and collaboratively with our business, academic and civic partners to optimise economic impact across the whole of Scotland.”